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China to lay out reform plans

  • China's leaders are set unveil a 10-year reform plan today following a four-day meeting that involved the 205-member Central Committee of the country's ruling Communist Party.
  • While the government has been playing up the possible outcome of the parley, economists have been dampening expectations. China's leaders need to balance their desire to overhaul the economy with what is seen as the need to ensure that growth remains strong enough to preserve stability.
  • Reform could involve eight key areas, including finance, taxation, state assets, innovation, foreign investment and governance. The liberalization of the economy is expected to be a key element of the program.
  • Meanwhile, aggregate financing in China dropped to 856.4B yuan ($140.6B) in October from 1.4T in September and came in well below forecasts of 1.115T yuan. The decline may well reflect a tightening of lending conditions by the People's Bank of China.
  • The M2 money supply rose 14.3% on year vs consensus of +14.2%.
  • The Shanghai Composite +0.8%.
  • ETFs - Stocks: FXI, GXC, PGJ, YAO, FCHI, PEK, CAF, YXI, XPP, FXP, MCHI, YINN, YANG, TCHI, CHXF, KFYP, HAO, ECNS. Bonds: DSUM, CHLC. Currency: CNY, CYB, FXCH
Comments (5)
  • Mike Holt
    , contributor
    Comments (1464) | Send Message
     
    Unless the new leadership of the CCP implements reforms, they have lost control over lending that occurs outside normal channels for the stat-controlled banks. As such, the decline in the official debt statistic is meaningless. The amount of debt incurred over the past five years through shadow banks is not even known, but is estimated to be somewhere between $2.5 to $5 trillion.

     

    Much of this is incurred to finance construction activity that creates jobs, but when completed, not enough revenue to pay even the interest on the debt. But, "local government financing platforms" can issue new debt (create money) almost at will.

     

    The scope of the problem can be put into better perspective in two ways: First, consider that Fixed Asset Investment spending (including construction activity) has soared to 50% of China's GDP since 2008, which has likewise swelled to $8 trillion despite a slowdown in exports for their "manufactured" (or assembled) goods. Second, even the most casual observer could not have helped bu notice the skylines of cities across China being transformed before their very eyes. Their empty cities and bridges to nowhere are often engineering marvels completed in record time, but financed with loans that the CCP tried to prevent but couldn't because local governments relied upon these to satisfy the GDP growth targets mandated by the central government.

     

    Major US financial institutions, such as Bank of America, that helped reform the banking system in the 1990's are now selling their interests in Chinese banks after sound lending practices were abandoned in 2008. Non-performing loans and accounts receivables are now surging, despite banks attempts to jettison bad loans through the issuance of the same off-balance sheet high-yield "Wealth Management Products" that have allowed local governments and non-state owned enterprises to accrue debt to maintain their "growth." If the centerpiece of planned reform is to "allow" foreigners to establish minority interest investments in Chinese companies and banks, then I would hardly call that a reform.

     

    Time is growing short, however, as demand for the commodities that were needed to sustain the construction boom has already fallen and uncompleted buildings are surrounded by cranes--but no workers despite the fact that the construction industry in China is so large it could build cities with the same square footage as Rome in a month.

     

    Will it help to move peasants into these empty cities to "simulate" the urbanization trends that led to higher standards of living, and higher levels of domestic consumer spending, in more developed countries? It may prevent them from returning to their farms where they could sustain themselves off the land after retreating from the sweat shops in other urban areas where jobs actually exist. But playing video games for money is hardly a recipe for success for either these relocated peasants or the Chinese economy.

     

    In the meantime, the GDP numbers may look healthy, but like many of the rapidly constructed buildings, there appear to be growing cracks in the foundation of their economy. What real reforms does the new leadership of the CCP have in mind, and how can these reforms be implemented without triggering an abrupt halt in their $4 trillion of annual spending on Fixed Asset Investments to create new supply when it is increased demand, and less debt, that the world sorely needs? If a credit crisis is to be averted, it may require China to pull out all the stops in their efforts to transition their economy into a high tech powerhouse. All they need is more know how and intellectual property. Hmmm, care to invest in China anyone? I'd wait until true reforms are in place.
    12 Nov 2013, 08:04 AM Reply Like
  • Sam Liu
    , contributor
    Comments (3864) | Send Message
     
    "sound lending practices were abandoned in 2008"

     

    Cn was in a recession (caused be the USA, serious circumstances not dealt with ever before) and the Central Govt panicked, so It dumped money into the economy to try every which way to stimulate it.
    12 Nov 2013, 07:26 PM Reply Like
  • Sam Liu
    , contributor
    Comments (3864) | Send Message
     
    "transition their economy into a high tech powerhouse. "

     

    Cn is a well-diversified economy.
    12 Nov 2013, 07:29 PM Reply Like
  • Sam Liu
    , contributor
    Comments (3864) | Send Message
     
    Mike let me refer to SF Photo's post:
    http://seekingalpha.co...
    @Hal44:

     

    1. Construction continues unabated but getting spread further inland and away from the coast. This is what the fear is: because most of these tier-2 and tier-3 cities like X'ian, Chongqing, Chengdu, Zhengzhou, Shenyang, etc. are located inland, there are too many office buildings, shopping malls, condo complexes, etc. going up SIMULTANEOUSLY, thus creating the appearance of "ghost towns". That happened too in the tier-1 cities like Beijing, Shanghai, Shenzhen, Guangzhou ten years ago. Shanghai Pudong was an empty wasteland back then. Now it's home to China's financial firms and global MNCs.

     

    If China succeeds in transforming its economy from an export-oriented, labor-intensive commodities manufacturing economy to a domestic consumer-oriented, knowledge-based services economy, then all those "ghost towns" will be quickly filled up in 5 to 10 years. Already, we're seeing signs of Chinese firms and MNCs relocating and expanding their back-office operations to these tier-2 and tier-3 inland cities and away from the tier-1 coastal cities.

     

    2. It's difficult to make money on Chinese stocks and that's why most Chinese investors stay away from them given the dismal performance of the domestic stock market and China's opaque legal system and primitive financial system. Additionally, big-cap SOEs such as China Mobile, Petrochina still dominate the domestic stock market. That's the reason why most Chinese internet companies prefer to list in the U.S. If rising consumerism becomes reality, the best way to play the Chinese card is to bet on external entities doing business in China such as U.S. casino companies in Macau (Sands China, Wynn Macau), HK real-estate companies in China (Wharf Holdings), etc. However, there are a few good big-cap high-tech names coming out of China such as Lenovo, Tencent and soon-to-be-IPO'd Alibaba. Small internet caps such as VIPShop (discount retail), SouFun (real-estate listing), Ctrip (online travel) are also quite good given their franchises. I would stay away from popular names such as Baidu which trade mostly along with Google and other Chinese copycats that try to mimic U.S. business models such as Renren (the alleged Facebook of China) and Dang (the alleged Amazon of China).

     

    Finally, most Chinese investors prefer tangible assets and almost always look to real-estate as a "safe haven" to park their cash. There is a good PSYCHOLOGICAL reason why this is so: almost all banks in China are SOEs with a limited number of foreign banks. Because the Chinese State owns and manages these local banks, there is no way for Chinese investors to hide their private assets from the prying eyes of the ubiquitous CCP unless they turn their excess cash into something they can hold and see and that's real estate. Between the CCP-controlled banking system, the unofficial "shadow" banking system or the opaque domestic stock markets, most Chinese investors prefer real-estate. Western observers don't understand this mentality: what Westerners think of as a "real-estate bubble" is considered "safe haven" by Chinese investors. I mean, Chinese investors could buy gold or antiques or wines instead of real-estate, but those commodities are hard to come buy in China.

     

    China is still a developing country with lots of room for growth. In the short term (3-5 years), we could see an oversupply of real-estate, but in the medium to long term (5-10 years), Chinese real-estate would become "normalized" with demand finally catching up with supply. That's my wumao view.
    12 Nov 2013, 07:31 PM Reply Like
  • Rseye
    , contributor
    Comments (799) | Send Message
     
    China growth = will it rise or fall looking ahead ? Analyzing FXP due to uncertainty ... Take care
    12 Nov 2013, 06:32 PM Reply Like
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